Economic Preview:Slightly higher CPI likely

CBS.MarketWatch.com

WASHINGTON (CBS.MW) -- Investors are stacking up sand bags and nailing plywood on the windows in anticipation of another blowout inflation number on Tuesday.

Wall Street is issuing the economic equivalent of a hurricane warning for the 8:30 a.m. eastern time scheduled release of September's Consumer Price Index at the Labor Department.

After Friday's surprising 1.1 percent jump in the Producer Price Index, economists are edging their forecasts for the CPI a bit higher.

Worries about inflation and the Federal Reserve's response to price pressures washed away investor confidence on Friday and continued to erode values on Monday, even as corporations continued to turn in stellar earnings results (with a few notable exceptions).

As usual, the Federal Reserve is at the center of all the anxiety. Will the Fed hike rates on Nov. 16 to counter the early signs of inflation that have surfaced in the past month?

Or, even more troubling, is the Fed already behind the curve, necessitating a quicker and steeper move in the Fed's benchmark Federal funds rate?

As if those questions weren't difficult enough, the data will be clouded by unusual or one-time items, just as the Producer Price Index was on Friday. See related story.

"If the PPI was so high, you've got to figure some of that will flow through into the CPI," said Irwin Kellner, chief economist for CBS MarketWatch and the Weller professor of economics at Hofstra University.

That's because inflation at the consumer level is getting buffeted by some of the same factors that pushed the PPI so high in September: higher oil prices, a one-time spike in tobacco prices and restraint by the part of auto dealers in slashing prices.

But don't expect the CPI to rise 1.1 percent, or anything close to that.

More 'subdued'

"It'll be a little more subdued," said Lynn Reaser, chief economist for Bank of America Private Bank. "The CPI is more diversified" than the PPI, because the CPI includes all sorts of services that haven't been hurt by the jump in oil or commodity prices that sent the PPI higher.

A group of economists polled by CBS.MarketWatch.com expects the CPI to have risen 0.4 percent in September, just ahead of the 0.3 percent gain in August. The core rate (which excludes food and energy prices) should rise about 0.3 percent. Those would be the strongest numbers since the 0.7 and 0.4 percentage numbers in April that set the stage for all this worry about inflation and higher interest rates.

Kellner's forecast is for a 0.6 percent rise in the overall CPI and 0.5 percent gain in the core rate. Even so, he doesn't think the recent rebound in oil and other commodity prices has been passed through to consumers yet, a view echoed by Reaser.

"This does not herald a start of a new round of inflation," Reaser said. She points to signs of cracks in the oil production quotas set by the Organization of Petroleum-Exporting Countries.

"I'm still relatively sanguine about the outlook for inflation," said John Ryding, senior economist at Bear Stearns and a top advocate for the idea that increased competition and higher productivity is squeezing inflationary pressures out of the economy.

Ryding, whothinks energy prices have peaked, says core inflation will grow 1.5 to 2 percent next year, as good or better than 1998 or 1999.

Watching stocks

For all its bluster of late, the Fed isn't only watching inflation numbers. It's also looking for signs that the sell-off on Wall Street is beginning to have an impact on consumers' wallets, Reaser said.

Alan Greenspan's tough talk on Thursday only reinforced Kellner's opinion that the stock market is the key to the Fed's next move on interest rates. "If the Dow is 1,000 points lower in November, the Fed won't raise rates," Kellner said. On the other hand, the market could be up by 2,000 points, which would force the Fed to act.

The bullish Ryding argues that corporate earnings are strong enough to justify a rally. "Companies are delivering," he said. "But you can't have any conviction when you don't know what the Fed's doing on interest rates."

"We've got a strong economy, not because interest rates are low, but because the U.S. is on the cutting edge," Ryding added.

Ryding, for one, is getting impatient with the stop-and-go signals from the Fed. Between the changes in the bias and the FOMC minutes and the after-meeting comments and the governors' speeches, he's beginning to feel a little like Charlie Brown trying to kick the football that Lucy keeps pulling away at the last minute.

Even Ryding might prefer that the Fed just get it over with, and hike interest rates.

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